The coalition government is facing a backlash against the most radical welfare reforms since the second world war after ministers unveiled plans to withdraw hardship payments from unemployed people who forfeit their right to benefits.

Welfare groups warned that the Tories and Liberal Democrats were embarking on a "retrograde step" after the government proposed replacing the hardship payments with loans.

Iain Duncan Smith, the work and pensions secretary, yesterday published his welfare reform white paper unveiling a new universal credit, which will combine all out-of-work benefits and in-work support in one payment from 2013-14.

This will be underpinned by a tough sanctions regime that will see benefit recipients lose their benefits for up to three years if they repeatedly refuse a job or community work.

Duncan Smith said Britain's "dependency culture", in which 1.5 million people have been placed on out-of-work benefits for nine of the last 10 years, had led to a national crisis. In a sign of the toughness of the new regime, benefit recipients who forfeit their payments after "serially and deliberately" breaching the new conditions may lose their right to apply for a hardship payment.

The white paper says: "We are considering replacing the current system of hardship payments with loans to the extent that is possible. We also want to consider ways of ensuring that those who persistently fail to meet the requirements imposed upon them cannot rely on these alternative sources of support for the entire duration of their sanction."

Tim Nichols, of the Child Poverty Action Group, said: "It would be a retrograde step for that important support to be turned into loans."

Hardship payments are usually paid to claimants contesting sanctions imposed on the amount of jobseeker's allowance they receive. In the year to April 2010 around 20,000 jobseeker's allowance claimants were sanctioned for refusal of take employment. However, under the new scheme cash given to claimants to tide them over while a claim is being considered would be recouped by the state.

Duncan Smith, who suggested it was a "sin" for people to fail to take up work, insisted the sanctions would be imposed on a small number of claimants. "Sanctions are not about hammering people," he said on a visit to the Arlington Centre in Camden, north London, where jobless people are helped back to work. "They are about sending a clear signal to those who are going through this process that if you co-operate, if you work with us, you will go through this quite happily and nothing will happen to you." He said his changes would make all claimants better off.

But Labour challenged that after the white paper showed some new benefit recipients would be worse off. The paper shows that claimants in the seventh decile, near the middle income group of claimants, will receive around 50p a week less than they would have received under the current system.

Douglas Alexander, the shadow work and pensions secretary, said: "Iain Duncan Smith has said there will be no cash losers, but it is becoming clear that that pledge doesn't apply to new applicants. And many families already receiving tax credits will be shocked to find their support is going to be taken away at a faster rate under these plans than today."

Women could also be big losers after the white paper proposed the payments go to only one member of the household, raising the prospect that the childcare component of the tax credit could end up being paid to the man. This amounts to £100 a week for some couples.

The public appeared to back the new policy. A survey for Channel 4 News by YouGov showed that 58% thought the coalition should "cut benefits more, or have got the balance of change about right".